Central Bank Instant Payment Systems and its Impact on Bank Performance and Financial Stability: Evidence from Brazil

Abstract

The present thesis explores the rise of Pix, an innovative instant payment system developed by the Central Bank of Brazil, and its potential shocks in the performance and stability of the Brazilian banking system. Using quarterly data from 73 financial institutions during the period of 2020 to 2023, this paper investigates whether the total financial volume and number of transactions conducted through Pix has had a significant impact on the profitability measures, performance transmission mechanisms and individual risk of Brazilian banks. The results indicate that Pix has negatively impacted the profitability of banks, primarily through lowering its fee income and net interest margins. In addition, by investigating the difference responses to Pix between traditional and digital banks, the findings reveal that the profitability of the latter group is significantly more sensitive to increases in Pix’s transacted volumes. Furthermore, the individual insolvency risk of both traditional and digital banks is deteriorated by Pix, although the effect for digital banks is considerably more adverse. As FinTechs take the bigger losses, the findings emphasize importantdifferences in the business models of incumbent and digital financial institutions. Finally, it suggests that Pix acts as a new player in the payment market, increasing competition between Brazilian banks and pressuring their net interest margins as they compete for depositors.